A Quick Guide to Capital Gains Tax

Woman expanding small business.

[Updated April 19, 2023]

Are you an individual or business that sold an asset? If so, you may be charged with Capital Gains Tax (CGT). Although CGT is part of your responsibilities, many Australians forget that selling an asset can lead to tax consequences.

Assets can be in different forms, including shares and investment properties. Let’s say that your business enjoyed a successful transaction of selling a parcel of land. Or perhaps you sold an office building so you can move to another area and do your business from there.

Is Capital Gains Tax Applicable to You?

The two cases given above are just some of the examples in which you can generate a Capital Gains Tax. The gain can involve a block of land, a building, or any investment property. It can also be shares, managed investments funds, and the like. Intangible assets, such as your business’ contractual rights, when sold, can mean that you need to pay CGT.

Even the goodwill of your business, buying out a partner, and selling a part of your business can all generate you CGT. You could also be charged with this tax if you add more spaces to your warehouse or a factory plant. In case you plan on changing your business structure, it helps to be aware that it could lead to CGT. If you lost some of your business assets, you could be charged this tax if you received compensation for the damage.

But not everything is subject to CGT because there are some important exceptions to know about. Capital Gains Tax does not apply to you if the gain is under another specific section of the tax law. An example of this is selling depreciating assets, which are not subject to CGT. Such investments, along with the trading stock, have their distinct tax rules.

One more exception that should be discussed is when you sell your principal residence. Disposing of your family home, which should primarily be where you live daily, will result in a CGT-free transaction.

Man selling property

How to Calculate Your CGT

Before calculating CGT, you must know that the particular sale is a CGT event. It does not just pertain to selling an asset. A CGT event can involve any of the following:

  • You give away an asset
  • The investment is lost or destroyed
  • You’re no longer an Australian resident

Capital Gains Tax focuses on the newly created or acquired asset’s increase in value. You will need to pay for the tax associated with the increased value the same year you sold the asset.

How Much Capital Gains Tax Do I Have to Pay?

Capital gains tax is dependent on the period of time you have held an asset. If you have held an asset for less that 12 months, you will pay tax on 100% of your capital gain at your income tax rate. However, if you have held an asset for 12 months or longer before selling it, ATO offers a 50% discount on the capital gains tax.

So how much will you pay? The amounts where CGT apply vary. However, the capital gain is computed with your income, with the result taxed based on the marginal rate you’re required to pay. The Net Capital Gain pertains to the amount added to your assessable income.

When it comes to calculating CGT, two main methods can be used:

The Discount Method

You can work out your Capital Gains Tax through the discount method where you take the cost base, which is the price you paid for the asset. It also involves all the costs incurred in selling and purchasing the asset, as well as some incidental costs. Then, you subtract it from the proceeds. The answer you get is the Gross Capital Gain.

After getting the Gross Capital Gain, the next step in this method is to remove any capital losses. You can then get the Net Capital Gain by applying any discount factor. As an Australian resident, you’re entitled to a 50% reduction, whilst a 33 1/3% discount applies to super funds. In either case, it is required that the asset has been held for at least 12 months; otherwise, the discount will not be available. It should also be noted that the discount does not apply to companies.

The Indexation Method

The indexation factor allows you to increase the cost base. However, it only applies to assets that were purchased before September 1999. Through this method, the cost base is modified or adjusted, and therefore you will not pay tax on the increase in value.

Using the indexation method, though, means that you cannot get a discount. There’s only one path to take when calculating the CGT, so you should choose carefully. In most cases, Australians get better results with the discount method.

It’s important to understand that the tax law has some exceptions that may be applied to your case. For instance, you may be required to use the market value of the asset you sold during that time. That means you need to completely disregard the proceeds and the asset’s cost base that you paid or received. Part of the reason why this exception exists is to prevent people from lowering their Capital Gains Tax through certain tactics, such as selling the asset to someone they know for a very low price.

Do You Find Calculating Your Capital Gains Tax Challenging?

If your answer is yes to the question above, you’re not alone. Often, people complain about calculating their capital gains because of the complexities involved. You may need an experienced tax consultant to guide you if you’re in the process of selling assets. This professional can also help if you have already sold an asset and wish to understand how much the transaction will cost you in your next tax bill.

Our experts at TaxReturn.com.au can assist you. Get in touch with us, and we will help you with your CGT-related concerns.


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